What is the California Rule and why does it matter?

Last week we wrote about the various forms of legal protections that exist for public pensions in the United States. We noted that a majority of states (34) follow a contract rights approach to public pension benefits. One of the most important states to adopt this approach is California. Why? Because the so-called “California Rule” has governed pension law in the state for decades and a dozen other states follow it. Two court cases are challenging the precedents set by the California Rule and a ruling is expected by the California Supreme Court this year.

The California Rule has its origins in a case from 1955 called Allen V. City of Long Beach. The idea behind the California Rule is simple: workers enter a contract with their employer on the day they begin work and the pension benefits they are offered as part of that contract cannot be diminished, unless replaced with similar benefits. To cut or reduce pension benefits without an equivalent benefit to offset the cut would be a violation of the employment contract. California courts have continued to uphold the precedent of the California Rule in multiple cases over the past six decades.

A dozen other states that also use a contract rights approach to public pension benefits have chosen to follow the principles of the California Rule. Those states are:

Alaska

Colorado

Idaho

Kansas

Massachusetts

Nebraska

Nevada

Oklahoma

Oregon

Pennsylvania

Vermont

Washington

This year the California Supreme Court is expected to hear two cases that challenge the California Rule. The first case is Cal Fire Local 2881 v. the California State Employees’ Retirement System and the State of California. This case is the result of Gov. Jerry Brown’s pension law passed back in 2012. One of the changes made by the 2012 pension law was eliminating the ability of public employees to purchase additional years of service credit toward their pension benefit calculation. Defined benefit pensions are calculated according to a formula that includes salary, years of service, and a benefit multiplier. In some instances, public employees can purchase additional years of service credit so, for example, if an employee had worked for 20 years, they could purchase credit so their pension benefit is calculated as if they had worked for 25 years. This results in a higher pension benefit for the retired public employee. Cal Fire Local 2881 is challenging the elimination of this service credit provision.

Another provision of the 2012 pension law limited the types of income that can be used to calculate pension benefits. In Marin County, a group of public employees are arguing in Marin Association of Public Employees v. Marin County Employees’ Retirement Association that this is an illegal alteration of pension benefits. This case is awaiting a hearing before the California Supreme Court pending the outcome of a third case, Alameda County Deputy Sheriffs’ Association et al. v. Alameda County Employees’ Retirement Association et al., which also addresses this issue.

Both the Cal Fire and Marin cases could have major impacts on public pensions in California and in other states if the California Supreme Court strikes down any of the precedents from the California Rule. Of course, the California Supreme Court could just uphold the California Rule and rule in favor of the public employees in both cases. This would be consistent with more than six decades of case law. If, however, the court chooses to strike down the California Rule in whole or in part, it could open up a Pandora’s box of further challenges to public pension benefits across the country.

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